Women rowing hard in a Dragon Boat race Sydney

Is Competition Good?

By Oliver Damian

Competition is fabulous if you're buying. It is not so good if you are selling. For example: as a buyer of cooked food and dining services, I am very lucky to be living in Sydney. I am spoilt for choice. From the cheapest quick eats to top chef fine dining. Thanks to a healthy diverse mix of ethnic inward immigration, I have quite a pick of: Chinese; Japanese; Spanish; French; Italian; Korean; Taiwanese; Portuguese; Indian; Vietnamese; Brazilian; Mexican; Thai; Malaysian; Filipino and the rest of the world's cuisine. Even though the price of real estate in Sydney has sky rocketed, eating out remains fairly affordable especially in the inner city areas, China Town and ethnic enclaves like: Vietnamese in Marrickville, Cabramatta, Bankstown and Canley Vale; Korean in Campsie; Italian in Leichhardt and Haberfield; and Indian in Harris Park and Parramatta. The high supply from a very large number of competitors is keeping a tight lid on prices.

Not only do customers enjoy affordable prices, they also benefit from continuous innovation. Because there are so many sellers in the market, restauranteurs are forced to continually come up with innovative dishes, cool looking premises, themes, and dining concepts, among other things. Recent blossoming in innovation I noticed are in cafes: from the sourcing of coffee beans; roasting; grinding; to cutting edge espresso machines; milk frothing; coffee art and even hipster premises. I've seen how the humble Australian flat white has slowly taken over the cafes of London and Paris. There is also a lot of innovation in the dessert space as well: from creative and global award winning flavours in artisinal gelato to: French macaroons; cronuts; funky Taiwanese icy treats; frozen yoghurt; Japanese matcha treats; liquid nitrogen ice cream; and much more.

Even point-of-sale systems can be used as a unique component of the overall selling proposition. I distinctly remember my delight when: I first used the iPad devices in Wagaya and Kura to order my Sashimi, Karaage and Calpis by swiping screens and clicking on little pictures; or when I tapped the contactless card issued by Vapiano to order my Fettucine Putanesca and wait while it is cooked in front of me.

Restauranteurs have to innovate because they need to some how stand out to get a foothold in the market. Unless you have severe dietary restrictions, the switching cost from one restaurant to another is quite low. Even at the last minute, you can change your mind and walk across to Pappa Rich instead of eating in Nandos. To keep them coming back, restauranteurs must continually delight customers through never ending tweaking of price, taste, service, premises or whatever secret sauce they could get their entreprenurial hands on.

As buyers of dining services, we benefit from this intense competition among the people who supply us our food, which is a pretty good thing. The picture on the other side is not as rosy.

I imagine that as a new entrant, the Sydney restaurant market would be a tough nut to crack. The market already feels crowded. As a new kid on the block, one has to come up with a really interesting, exciting, and creative proposition to simply get noticed. Even if one succeeds in entry with a winning fresh concept —getting a healthy profit margin would not be a walk in the park. The economic structure of this industry is a tough one. On one hand you have the high costs of: premises rental and fixtures; labour; permits, licenses and regulatory compliance; marketing and advertising; and the list goes on. On the other hand, you have this tight lid on prices you can charge. This is one tough mofo of economic structure to contend with.

It does not end there. Even if by some miracle you successfully entered the market with your new funky concept and with extraordinary luck managed to pierce through the tough industry economic structure— holding on to your fat profit margins could be a nightmare. As sure as ants cotton on to bread crumbs and splashings of peanut butter around your picnic blanket, competitors would soon be at your heels. It doesn't take much for competitors in the food service industry to copy a successful business model— particularly if the current one they have is not working.

That is unless you somehow create what Pat Dorsey in his Little Book That Builds Wealth called an economic moat around your business to defend your castle of fat profits. For example Starbucks and McDonalds have economic moats around their franchises in the form of extensive network of prime location real estate, economies of scale in their supply chain, advertising and marketing costs built through years of heavy investment in building up their respective brands.

I've seen this cycle over the years: first-to-market players unable to defend their fat profits from hordes of copy cats. For example, when I lived in the Philippines: one family succeeded in finding a successful formula for selling roast chicken on the street (ie Baliwag lechon manok), which sparked a Cambrian explosion of lechon manok outlets in the street corners of every town and city. When the irrational exuberance for lechon manok died down, it left a trail of new lechon manok operators who bit the dust. Those who survived the culling were franchises able to create a recognizable brand, build an extensive network of shops, and introduce further innovation (ie Chicken Inasal). The survivors, however only enjoy leaner post-exuberance profit margins. A similar cycle happened to the schwarma, tapsilog, pearl milk tea, frozen yoghurt and other food fads. Now I've heard there's an explosion of ramen eating places back there. Of course there are a handful of industry players that secured long term and continued success by for example building up a stable portfolio of profitable food brands—through decades of real estate network expansion, brand building and continued scaling up of operations. Just think Jollibee Foods Corporation. Given their gigantic scale, it would be extremely difficult for a newcomer to compete at their level. These mega-brands have succeeded in building wide economic moats around their castles of profit. Sad but true, the gospel of Matthew got it right: the rich get richer, the poor get poorer.

Similar creative destruction happens in Sydney. I only need to walk along George, Crown, Sussex and Dixon Streets around the CBD and count how many food shops closed, changed owners, or otherwise rebranded— to guage the level of competitive brutality in this market.

So is it then just a matter of dining out as much as you can to enjoy the fruits of brutal competition; and to conversely avoid starting a restaurant business if you can help it? Not so fast Paloma.

If you extend the principles above to other areas of our wonderful life in a market-driven society— you will soon realise that if you pick up one end of the stick, you also pick up the other end. No one is exclusively a buyer or exclusively a seller. We are both buyers and sellers of various goods and services in the myriad aspects of our life.

So whilst you might enjoy the benefits of lower prices and perpetual innovation brought by creative destruction in a brutally competitive industry supplying to you— you might at the same time be earning your living by owning a business selling goods or services in a similarly competitive industry; or even worse, you could be selling your time working in one. It is simply the case that it is extremely difficult for companies to provide generous benefits to its employees if the company is barely keeping afloat in a hyper-competitive environment. It is much easier for a monopolist enjoying fat profits to be generous to its employees. Which is why, by the way, it is not so common nowadays to see generous pension plans, health plans, and other perks employees used to enjoy in the good old days of working for giant industrial monopolies. We have entered an era of global competition. Companies that used to dominate their domestic markets are now subject to competition from overseas where the operating costs are cheaper. Suddenly they can no longer afford to be ultra-generous. This is the sad story of Detroit. American car companies used to dominate the US market. They were able to provide generous wages and pension plans to their workers. When cheaper cars from more efficient and more innovative car companies from Asia aggressively entered the US market, the American car companies were not able to protect their fat profits. As innovation stalled and revenues dropped, the American car companies, for a time looked like shell companies whose sole purpose was to service the bloated pension obligations inherited from the glorious past.

So competition can be bad for you if it boots you out of your gravy train. Competition could also be bad for you even if you are the buyer. There could be instances where instead of fostering innovation, hyper-competition could result in a race to the bottom. For example, heavy competition among discount airlines could push some operators to cut corners, thereby compromising the safety of its passengers.

Of course there are still companies today who can afford to be generous to its employees. Interestingly, some of these are what Peter Thiel called creative monopolies. These are highly innovative companies (usually in the technology sector) that operate in a very dynamic environment and which manage to dominate their markets through continuous innovation and creative destruction of their own products and services. These are the Google, Apple, Facebook and Valve corporations of today's world. These companies can afford to be super nice to their employees because they enjoy fat profits or have healthy capitalization.

However, these creative monopolies are not like the traditionally bad monopolist who got its monopoly power through regulatory rent-seeking or other similar means or who otherwise simply collects monopoly rent without innovating— thereby causing the market it dominates to stagnate. In contrast, these creative monopolies more often than not got there through the merits of innovative technology, design and excellent customer service.

What's more, they cannot afford to sit on their laurels, lest they fall victim to the next two-person-in-a-garage start-up. With their fat profits, creative monopolies could spend a lot in research and development to further their competitive advantage and at the same time making better and better things for us.

The stranglehold on the market by these creative monopolies also does not last that long because of the accelerating phase of technology evolution. The next disruptive technology always seems to be waiting by the wings. It may just be possible that we are entering a golden age of benevolent creative monopolies— just may be. Thank you Peter Thiel for your Zero to One: Notes on Startups, or How to Build the Future which upended years of my economics education that extolled the evil of monopolies.

Welcome to the brave new world of complexity where competition can sometimes be bad and monopolies can sometimes be good. So in the end: is competition good? I'm afraid I have to give the stock answer in Atenean oral examinations: well, it really depends on who is asking the question.